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The boardroom fight over the leadership of
Occidental Petroleumoxy -1.680672268907563%Occidental Petroleum Corp.U.S.: NYSEUSD70.2
-1.2-1.680672268907563%
/Date(1438376632010-0500)/
Volume (Delayed 15m)
:
4829352AFTER HOURSUSD70.2
%
Volume (Delayed 15m)
:
87732
P/E Ratio
N/AMarket Cap
53921952758.4259
Dividend Yield
4.273504273504273% Rev. per Employee
1163760More quote details and news »oxyinYour ValueYour ChangeShort position
is a high-stakes battle. Not only is the CEO's job in jeopardy, but the direction of the company has come into question. It's possible Occidental could ultimately be headed for a breakup, a move some analysts and investors think could increase the stock price by 30% or more.

Proxy solicitors shortly will recommend whether Occidental's shareholders should extend the terms of the company's 10 directors who are standing for re-election. Typically, this is an unexciting challenge. But in February, the board disclosed that it was seeking a successor to Stephen Chazen, the CEO who's had just 23 months on the job. Occidental (ticker: OXY) set no timetable for the search, and cited succession planning and good governance as the reasons.

Occidental's Executive Chairman Ray Irani (left) and CEO Stephen Chazen are said to be at odds over the company's direction.
Joe Pugliese/August

Chazen, Occidental's gruff former CFO, is popular with many large investors who believe he's focused on ways to create more shareholder value and open to new initiatives, including a breakup or spinoffs; the move to replace him is perceived to be engineered by Occidental's previous CEO, Ray Irani, 78, who was forced from his post in 2011 amid activists' complaints about excessive compensation and poor governance. Irani, however, was able to keep the executive chairman's post, though he is slated to step down from the board in 2014. The owner of 8.1 million Occidental shares, Irani reportedly was disturbed by the stock's 18% slump in 2012 after a huge run-up during his tenure. He's also said to remain upset about losing a job he'd held for more than two decades. Details of the dispute were first reported by The Wall Street Journal. The company denies that Irani was involved in the decision to seek Chazen's successor.

In the previous rift, activists at the California State Teachers Retirement System and money manager Relational Investors protested Irani's pay and management. But many board members, long-time colleagues of Irani, held on to their seats, including the lead independent director Aziz Syriani, 71, who joined the board during the Reagan administration.

The result is that the coming annual meeting, scheduled for May 3, has turned into a referendum on keeping Chazen, 66. In an unusual turn, voting against a director is seen as a vote for the CEO and voting for a director is seen as a vote against the CEO. Says Allen Good of Morningstar: "If any of the board directors are voted off, it will be a clear sign to the board that investors support Chazen."

The recommendations of proxy advisors MSCI/Institutional Shareholder Services and Glass-Lewis are important because they're widely followed by index funds, which hold a big chunk of Occidental stock. Several investors at different firms have barraged the proxy solicitors with calls supporting Chazen, says one investor who declined to be named. However, they worry the firms won't recommend voting against a board member without a formal activist campaign or a specific measure on the annual- meeting agenda.

In a letter to the Occidental board dated April 4, Steven Romick, a managing partner at shareholder FPA funds, said his firm would prefer that Chazen "should remain as CEO and be given broader responsibility in managing Oxy's diverse global interests."

The company's shares are widely believed to be worth far more than their recent trading levels, particularly if the company continues to cut costs. Two years ago, in a bid to boost growth, Los Angeles-based Occidental ramped up production in California and the midcontinent portion of the U.S. As a result, capital spending ballooned to $10.2 billion in 2012 from $3.9 billion in 2010. Return on capital fell, multiples compressed, and Occidental stock sank. The shares now trade at 1.6 times book value, versus a median of 2.1 in the past five years. The stock closed Friday at $81.85, down from $115 in 2011.

Chazen moved quickly to try to right the ship. In the fourth quarter, he unveiled a plan to reduce capital spending to $9.6 billion in 2013 and bring costs back down to 2011 levels. Occidental cut its rig count, decreased spending in the midcontinent's Williston Basin in North Dakota, and in oil and gas fields in Texas. Occidental expects $450 million in cost savings in 2013. Says Mark Laskin of
Invesco Equity & Income
(ACEIX): "If return on capital rises from here, then the stock would have 20% upside. Clearly, improving returns on capital are important."

THE FOURTH LARGEST E&P company in the U.S., with 3.3 billion barrels of proven reserves, Occidental has an impressive array of assets. They include major oil and gas holdings in the Permian Basin of West Texas, its midcontinent operations, as well as the oil and natural-gas discoveries in California. About 40% of its production is outside the U.S.; its international assets are primarily in the Middle East; it is involved in developing the enormous Shah natural-gas project with Abu Dhabi's state oil company. It also makes chemicals and trades commodities.

By one investor's estimate, excluding its chemicals and so-called midstream energy assets like marketing, pipelines, and transportation, Occidental's E&P operation is valued at just four times cash flow, even as its peers trade at six times. Just spinning out the chemicals and the midstream businesses could unlock some of the value in the E&P assets. "The idea of selling assets and becoming more focused in fewer areas would be the better way to go, since there are other entities so willing to pay for assets," says another investor.

The Bottom Line

The shares of Occidental Petroleum are worth about $105 a share, well above their recent price of $81.85. The parts could be valued as high as $124 a share.

Occidental could also spin off its shale assets in the Bakken area, the Permian Basin, and California.

Doug Terreson, analyst at ISI Group, thinks Occidental is worth $105 a share as is, but thinks the breakup value is about 20% higher. He says the E&P operation is worth $38 a share, international $33, the Permian Basin assets $32, the California assets $15, the Abu Dhabi project $4, chemicals $3, its portion of the BridgeTex oil pipeline in Texas $4, and other midstream assets $4. Excluding net debt, that would bring the stock to roughly $125 a share.

Through a spokesman, Anne Sheehan, director of corporate governance at the California State Teachers Retirement System and leader of the charge to unseat Irani in 2010, said, "We would re-engage if necessary and, in fact, have a good relationship with the company." Ralph Whitworth, founder of activist Relational Investors, declined comment.

Occidental declined to make Irani or Chazen available for an interview. Instead, it furnished Barron's with a statement from lead independent director Syriani. He said Irani has not attended or played any role in these board meetings to choose Chazen's successor. "Any suggestion otherwise, or insinuation that Dr. Irani is guiding the process, is completely and flatly wrong." Irani, he said, would retire from the company and board at the end of 2014. "At no time has the board discussed a role for Dr. Irani beyond 2014, nor has Dr. Irani approached the board to have his tenure extended or to discuss having any role with the company beyond 2014." He did not address any of the other speculation, which is likely to grow in the coming weeks.